Digital wallets are now the preferred way to pay for goods and services online, with 53% of consumers using them more often than traditional payment methods in 2023. With thousands of branch closures, it’s a trend that coincides with the continuing decline of traditional banking.
Today, digital wallet providers, such as Apple Pay, Google Wallet, and PayPal, process over 13 billion financial transactions every year. That number will only continue to grow. However,
as the world of finance shifts ever closer to a cashless economy, digital transactions are facing greater scrutiny from regulators and security experts alike.
Digital payments provide convenience and accessibility, but all too often do the benefits come at the cost of increased security risk – particularly in the form of phishing scams designed to steal personal and financial information. Moreover, a relative lack of regulatory oversight has resulted in a swathe of unexpected account closures and breaches of consumer privacy.
Industry regulators are racing to catch up in a bid to protect privacy, prevent fraud, and grant digital wallet users the same protections as those applied to traditional banking. In the US, a new ruling by the US Consumer Financial Protection Bureau, finalized on November 21, 2024, states that all transactions taking place through digital wallets will be subject to government supervision.
Closing the payments divide
While digital wallets now account for the majority of transactions in several countries, including the US and the UK, there remains a significant generational divide. Digital spending is far more prevalent among younger generations, with 60% of Gen Z and 51% of millennials spending more using digital wallets, compared to 41% for Gen X and just 28% of baby boomers.
Clearly, older generations still prefer traditional payment methods for a variety of reasons, one of them being a lack of trust in digital wallets. That lack of trust isn’t unfounded either; losses to online payment fraud are expected to exceed US$343 billion by 2027. Older generations in particular tend to view digital wallets as being inherently less trustworthy than traditional banks.
To close the generational divide, digital wallets must be afforded the same regulatory oversight and security and privacy controls as traditional banking, which is exactly what the new CFPB ruling aims to do.
However, regulators have long had a hard time keeping up with consumer demands for privacy and security. It’s vital that financial services organizations themselves take the initiative, and that means incorporating security and privacy by design and default. This applies to traditional banks too which, in order to stay relevant, have to compete with neobanks and other fintechs.